Sunday, November 23, 2008

New Evidence on Reference Effects from IZA Working Paper

From IZA Working Papers

Economic Satisfaction and Income Rank in Small Neighbourhoods
by Andrew E. Clark, Nicolai Kristensen, Niels Westergård-Nielsen
(November 2008)
forthcoming in: Journal of the European Economic Association

Abstract:
We contribute to the literature on well-being and comparisons by appealing to new Danish data dividing the country up into around 9,000 small neighbourhoods. Administrative data provides us with the income of every person in each of these neighbourhoods. This income information is matched to demographic and economic satisfaction variables from eight years of Danish ECHP data. Panel regression analysis shows that, conditional on own household income, respondents report higher satisfaction levels when their neighbours are richer. However, individuals are rank-sensitive: conditional on own income and neighbourhood median income, respondents are more satisfied as their percentile neighbourhood ranking improves. A ten percentage point rise in rank (i.e. from 40th to 20th position in a 200-household cell) is worth 0.11 on a one to six scale, which is a large marginal effect in satisfaction terms.

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